February 11, 2025 - As manufacturing and distribution companies continue to expand, while both federal and state/local policies are enacted to incentivize increased manufacturing, production, and distribution activities, the need for identifying the correct inventory storage, maintenance, and logistics solutions is essential. While some manufacturing and distribution companies may choose third-party providers for a host of different reasons, others may choose to acquire or lease their own warehouse and logistics properties.

When a business is identifying prospective new warehouse and distribution locations, there are a myriad of different considerations which play a critical role in the site selection process. If your manufacturing and distribution business is making such a location decision, or plans to in the near future, here is a checklist of the key criteria that needs to be considered for such an important business decision.

1. Strategic planning and evaluation based on company needs

   • Proximity to customers or shipping agents.
   • Proximity to vendors and suppliers.
   • Access to major highway systems.
   • Proximity to ports and airports.
   • Distance to company headquarter location or manufacturing/production facility.
   • Scalability in terms of whether the warehouse or distribution center can accommodate future growth and expansion to avoid additional costs or business disruptions.
   • Access to potential labor pool that will not be cost-prohibitive.

2. Property costs and capital expenditures/construction

   • Costs for purchasing or leasing the property (industrial prices are still relatively high).
   • Construction costs for facility improvements, including engineering, legal, permits, environmental surveys, etc.
   • Zoning and permitting processes in terms of length of time and company resources.
   • Utility, infrastructure, road, or easement changes and renovations.
   • Equipment and fixture costs for forklifts, shelving and racking systems, packaging machines, and other warehouse equipment.

3. Ongoing operational costs

   • Utility costs for electricity, water, heating, and cooling.
   • Regular maintenance, upkeep, and repairs for the warehouse and equipment.
   • Property insurance, liability insurance, and workers' compensation.
   • Employee compensation, benefits, and training costs.
   • Property taxes—real property tax and personal property tax.

4. Tax considerations

   • Property taxes: Assess the property tax implications of acquisition versus lease and potential capital improvements.
     • Locality may offer Payment in Lieu of Tax (”PILOT“) or Abatement program to freeze property assessments at pre-improvement value for an agreed-upon period.
     • Consider whether jurisdiction imposes a personal property tax and if there is an inventory exemption.
   • Sales tax:
     • If the company sells taxable products to retail customers, a warehouse location will create a taxable presence (nexus) in the state to warrant sales tax collection and remittance.
     • Use tax may be required on machinery and equipment that is not exempt where sales tax is not paid by the business.
     • Income and business activity taxes:
     • The presence of a warehouse or inventory in a state should create a tax filing and payment requirement.
     • Having a warehouse, distribution center, or inventory maintained at a third-party logistics provider could materially change the taxable income computation in several jurisdictions.
   • Depreciation:
     • Warehouses, certain improvements, and equipment can be depreciated over time, potentially providing significant federal income tax benefits that can be accelerated through a cost segregation study.
     • State tax rules will likely not conform with federal tax benefits from depreciation.
   • State and local incentives:
     • Tax credits and grants for job creation, job training, and capital investment.
     • Property tax PILOTS and abatements.
     • Tax increment financing from new revenues generated at project site.
     • Sales and use tax and property tax exemptions.
     • Economic development utility rates for manufacturing and production.

5. Regulatory compliance and environment

   • Compliance with environmental regulations could involve additional costs or impact the use of the warehouse.
   • Adhere to Occupational Safety and Health Administration (OSHA) standards and other safety regulations, which may impact operating costs and insurance.
   • Compliance with state/local labor taxes, mandates, unionization, and collective bargaining rules.
   • Permitting and approval process for construction or utility and infrastructure improvements.
   • Local zoning and traffic patterns/easement rules for trucks entering and departing the site.

6. Accounting and management considerations

   • Cost allocation: Proper allocation of costs between capital expenditures and operating expenses is critical for financial reporting and tax purposes.
   • Budgeting: Develop a detailed budget for both initial and ongoing expenses to ensure financial stability.
   • Cash flow: Maintain sufficient cash flow to cover operational costs and unexpected expenses.
   • Information technology: Establishing a cyber infrastructure for a new remote location, along with linking your enterprise resource planning (ERP) system to best manage inventory is crucial to transparency to your corporate location.
   • Entity type: The legal structure of your business (e.g., LLC, corporation) affects tax liabilities, financial obligations, and legal considerations pertaining to the liability of company owners. Consult with a tax advisor and attorney to choose the best structure.

Each of these considerations plays a critical role in the financial health and operational success of your warehouse or distribution facility. Citrin Cooperman’s Manufacturing and Distribution Industry Practice can help in the planning and consultation to optimize your financial, technological, and tax situation to ensure smooth operation and continued growth and success. If you would like assistance with considering a new warehouse for your manufacturing company, please contact your Citrin Cooperman representative.